Business Relief for Inheritance Tax

25 May 2022

3 minute read

Find out how our Wealth Planners can help you to reduce your future inheritance tax bill by using Business Relief Investments.

Failing to address potential Inheritance Tax (IHT) on your wealth could be an expensive mistake. HM Revenue & Customs (HMRC) collected an eye-watering £5.33bn in IHT receipts for the 2020/21 tax year1.

With careful estate planning it’s possible to significantly reduce your overall inheritance tax bill whether you’re passing on property, money or any other form of possessions.

As a reminder, if your estate is valued over the nil-rate band threshold, then an IHT rate of 40% will be applied to the excess when you die2.

There are some instances which can change the amount of tax charged, depending on your individual circumstances.

Here are some of the ways you can manage your IHT bill using Business Relief Investments.

How Inheritance Tax works

Before you start thinking about minimising IHT, it’s helpful to understand how it works. IHT is due on estates valued more than the nil-rate band threshold of £325,000. The threshold, which applies to each individual in a marriage or civil partnership, is frozen at this level up to and including the 2025/26 tax year3.

When an estate is above the nil-rate band threshold and includes a family home being passed to direct descendants, it may also be entitled to an additional ‘residence’ nil-rate band threshold – there’s no IHT to pay when leaving a home to a spouse or civil partner.

This additional threshold – also frozen until 2025/26 – can effectively raise the nil-rate threshold to £500,000 per person.

Gifts between UK-domiciled spouses or civil partners, whether made in life or on death can be passed on tax free. Unused nil-rate and residence nil-rate band thresholds can also be passed on to a surviving spouse/civil partner on first death, which means a surviving partner’s threshold could be as much as £1,000,000 in the current tax year.

Estates worth more than £2 million lose this additional threshold at a rate of £1 for every £2 over the £2 million threshold4.

Understanding Business Relief

Business Relief was originally introduced in 1976 as a form of IHT protection for the passing down of family businesses through generations. This tax perk has evolved over time and the scope for companies which meet the set criteria to benefit from Business Relief has expanded.

Now it’s also used as tax relief designed to increase investment in certain types of trading businesses. Where it applies, you are exempt from paying IHT on the value of qualifying unquoted shares that are held for at least two years and at the point of death.

What qualifies for Business Relief?

HMRC has set guidelines to determine which companies qualify for Business Relief status. Currently, only private unquoted companies and unlisted shares can qualify for 100% relief, however, these qualities do not guarantee eligibility. Another key prerequisite is that the company must be actively trading, meaning the firm can’t just hold cash, investments or property.

How you could benefit from Business Relief

If you have an estate which could attract IHT then Business Relief should be considered as one possible effective estate planning strategy and a tool for reducing your future inheritance tax bill.

Business Relief offers a range of benefits which compare favourably to other existing more conventional IHT strategies. You will receive greater control over your assets with all qualifying shares held in your own name. It also takes just two years for qualifying shares to save IHT, provided you still hold the shares at the point of passing. Additionally, your Business Relief qualifying investments will not chip away at your nil-rate band, preserving this tax-free allowance for less liquid assets, such as property.

As always, equal consideration should be given to the risks associated with a strategy dealing with unquoted, largely illiquid companies with an increased potential for valuation volatility.

Navigating the Business Relief investment landscape

Confirmation of a share’s Business Relief qualifying status is only provided by HMRC after the investor’s death. Asset managers which specialise in the management of discretionary portfolios targeting Business Relief qualifying companies can help navigate the legislative minefield and so reduce the potential risk of any unexpected IHT charges, whilst also potentially generating a source of return from investments.

Through rigorous and comprehensive investment and operational due diligence conducted by a team of skilled analysts, Barclays Wealth Management has carefully constructed a panel of three Business Relief products providing diversity through asset class and investment strategy. Our current panel provides IHT solutions through discretionary managed portfolios with exposure to a range of businesses, including renewable energy solar and wind farms, property lending firms and businesses which provide asset backed loans to media and entertainment companies.

We believe the experience, proven track record and operational robustness of our approved third-party Business Relief managers can help you maximise the benefits of Business Relief on your future IHT bill.

Please remember that the value of investments can fall as well as rise. You may get back less than you originally invested.

Next steps

Speak to your Wealth Manager or contact us if you would like to arrange a meeting with a Wealth Planner to discuss your options on ways to manage your IHT bill.

Your Wealth Planner can help you understand the effect of tax on your wealth and offer tax-efficient wrappers for your investments. They’ll be able to guide you towards making the right decision for your financial planning needs. Your planner can't offer tax advice – you should seek that independently. Please bear in mind that tax rules can change in future and their effects on you will depend on your individual circumstances.

This article does not constitute personal financial, tax or legal advice. Each person’s circumstances are different so if you're unsure about investing, you should speak to your Wealth Manager.

Things to consider

The value of investments can fall as well as rise. You may get back less than what you originally invested.

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